GE answers Abe's call to spur funding to Japan ventures

Bloomberg News

Published 9:52 pm, Tuesday, August 20, 2013

GE Capital is answering Prime Minister Shinzo Abe's call to increase funding for smaller companies that can become the next Google.

Fairfield-based General Electric's financing arm is lending 2 billion yen ($20.4 million) to a Japanese unit of Imation, which was backed by the data-storage media manufacturer's inventory and accounts receivable, according to Clark Griffith, managing director of structured finance at GE Capital Japan. This type of so-called asset-based lending helps small and growing businesses which have less access to more tangible collateral, such as real estate and machinery, he said.

"The Financial Services Agency is promoting asset-based lending as a way to get financing to companies that most need it," Griffith said in a telephone interview from Tokyo. "They're saying to use asset-based lending for those clients that you normally wouldn't be as comfortable extending loans."

The Bank of Japan in 2011 set aside 500 billion yen for asset-backed lending and Abe's Cabinet in June called for increased funding for smaller companies. Japan's rate of new business creation is less than half that of the U.S. and the Trade Ministry said in May a lack of financing has stymied growth of startups since 1990. It noted the nation's largest online retailer, Rakuten, has failed to match the scale of Amazon.com.

"Abenomics policies have already improved the operating environment at large companies and the benefits are trickling down to their smaller-sized business partners," said Renpei Nakamura, a director of the Association of Asset Based Lending of Japan. "The demand for this kind of funding at small and medium enterprises is on the rise."

Asset-based lending is a method of financing that uses as collateral a company's liquid assets, such as aggregate movable property, inventory collateral and receivables.

Abe's campaign to end deflation and spur economic growth backed by unprecedented monetary stimulus has yet to increase lending to smaller businesses, even as excess cash at Japanese banks climb to a record. Outstanding loans at SME companies fell for the sixth straight year to 180 trillion yen last quarter, or 66 percent of the total, according to data compiled by the BOJ. Borrowings by large enterprises climbed for the second straight year to 91 trillion yen.

Customer deposits at Japanese lenders exceeded loans by a record 189.1 trillion yen in June, the BOJ data show. The funding glut declined 0.6 percent in July, after climbing for four straight months.

"Japanese corporates are harder than multinationals to get over the line because it's so new to them," Griffith said. "What's helping us is the promotion of asset-based lending by the FSA. Once the megabanks start offering more conforming asset-based loans, I think Japanese SMEs will have an easier time accepting the loan terms and covenants."

Japan's ABL market may more than triple to 1 trillion yen in the "near future," up from about 300 billion yen now, Nakamura said. That compares with $620 billion of outstanding asset-based loans in the U.S. last year, according to data from Commercial Finance Association.

Elsewhere in Japan's credit markets, Mitsui Chemical is planning a sale of five-year debt, according to a statement from SMBC Nikko Securities. The company last offered notes in October, raising 14 billion yen via 0.651 percent securities due 2017, data compiled by Bloomberg show.

The country's corporate bonds have returned 0.09 percent this month, compared with a 0.25 percent gain for the nation's sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has lost 0.39 percent.

Resale Market

"In the U.S., inventory used to back the loans is valued differently because the idea is that it can be auctioned off in the end," said ABL industry group's Nakamura.

The lack of a developed market for the resale of collateral may hamper the adoption of asset-based lending in Japan, according to Maoki Matsuno, a Tokyo-based analyst at Daiwa Securities. There's also a chance market fluctuations can reduce the value of properties backing loans, making them in effect unsecured, Matsuno said.

Food products were used to back 98 facilities in the fiscal year ended March 2012, while farm animals and luxury-brand items served as collateral in 82 and 20 loans respectively, according to a data compiled by Mitsubishi Research Institute. Instances of borrowings backed by securities alone totaled 2,247, versus 651 which involved movable property, the report shows.

Imation's Funding

Imation, which was spun off from 3M in 1996, recorded losses in the past six years as it transitions away from older technologies by adding disk-storage products and security services. The Oakdale, Minnesota-based company last month reported its net loss in the three months to June 30 narrowed to $5.1 million, from a $12 million shortfall a year earlier.

The interest rate for an asset-based credit line such as the one for Imation typically ranges between about 2.73 percent and 4.23 percent in Japan, Griffith said, declining to give specific numbers for the deal. That compares with an about 0.52 percent average that the country's borrowers pay on syndicated loans, according to data compiled by Bloomberg.

"The corporate mindset right now is more positive and that always increases the demand for borrowing," Griffith said. "The Japanese banks have been slower to adopt the concept of lending on current assets. We saw this as an opportunity to bring our expertise to the market and utilize the experience we have."